Chapter 10/General Equilibrium and Economic Welfare



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Figure 10.2

22) Suppose the production possibilities for two countries, producing either food or clothing, are shown in Figure 10.2. They can each produce any linear combination as well. Measuring food on the horizontal axis, the joint production possibility frontier

A) will kink away from the origin at 20 units of food.

B) will kink toward the origin at 20 units of food.

C) will kink toward the origin at 10 units of food.

D) will kink away from the origin at 10 units of food.


Answer: B

Diff: 1


Topic: Production and Trading
23) Suppose the production possibilities for two countries, producing either food or

clothing, are shown in Figure 10.2. The USA has a comparative advantage in producing



  1. food.

  2. clothing.

  3. food and clothing.

  4. neither good.

Answer: A

Diff: 1

Topic: Production and Trading


24) Suppose the production possibilities for two countries, producing either food or clothing, are shown in Figure 10.2. They can each produce any linear combination as well. Measuring food on the horizontal axis, the joint production possibility frontier

A) will have a slope of -3/4 over the entire frontier.

B) will have a slope of -2 when less than 20 units of food are produced.

C) will have a slope of -1 when less than 20 units of food are produced.

D) will have a slope of -1/2 when less than 20 units of food are produced.
Answer: D

Diff: 1


Topic: Production and Trading
25) Suppose the production possibilities for two countries, producing either food or clothing, are shown in Figure 10.2. They can each produce any linear combination as well. Assuming free trade between these two countries, Canada will produce food

A) as long as any positive amount of food is demanded.

B) as long as more than 10 units of food are demanded.

C) as long as people are willing to give up at least 1 unit of clothing to get a unit of food.

D) as long as people are willing to give up more than 1/2 a unit of clothing to get a unit of food.
Answer: C

Diff: 2


Topic: Production and Trading
26) Suppose the production possibilities for two countries, producing either food or clothing, are shown in Figure 10.2. They can each produce any linear combination as well. If production occurs at the kink on the joint production possibility frontier,

A) the USA will specialize in food and Canada will specialize in clothing.

B) the USA will specialize in clothing and Canada will specialize in food.

C) each country will devote half of its resources to each industry.

D) joint output is minimized.
Answer: A

Diff: 1


Topic: Production and Trading
27) Suppose the production possibilities for two countries, producing either food or clothing, are shown in Figure 10.2. They can each produce any linear combination as well. Suppose each country is in competitive equilibrium prior to free trade being allowed. Once free trade is allowed, the price of food will be

A) two times the price of clothing.

B) equal to the price of clothing.

C) one-half the price of clothing.

D) somewhere between one-half the price of clothing and the price of clothing, depending upon the relative bargaining power of the two countries.
Answer: D

Diff: 1


Topic: Production and Trading
28) Suppose the production possibilities for two countries, producing either food or clothing, are shown in Figure 10.2. They can each produce any linear combination as well. Once free trade is allowed, Canada will produce

A) no clothing.

B) 10 units of clothing.

C) 20 units of clothing.

D) 5 units of clothing.
Answer: B

Diff: 1


Topic: Production and Trading
29) Suppose the production possibilities for two countries, producing either food or clothing, are shown in Figure 10.2. They can each produce any linear combination as well. Assuming that consumers place equal value on both of these goods and that free trade between these two countries is possible, gains from trade

A) are not possible.

B) exist because food is more expensive to produce in Canada than in the USA.

C) exist because food is more expensive to produce in the USA than in Canada.

D) do not exist because the consumers in each country have set their marginal rate of substitution equal to their country's marginal rate of transformation.
Answer: B

Diff: 2


Topic: Production and Trading
30) Suppose the production possibilities for two countries, producing either food or clothing, are shown in Figure 10.2. They can each produce any linear combination as well. Measuring food on the horizontal axis, the joint production possibility frontier has a horizontal intercept of

A) 10.


B) 20.

C) 30.


D) 50.
Answer: C

Diff: 1


Topic: Production and Trading
31) Suppose the production possibilities for two countries, producing either food or clothing, are shown in Figure 10.2. They can each produce any linear combination as well. Measuring food on the horizontal axis, the joint production possibility frontier has a vertical intercept of

A) 10.


B) 20.

C) 30.


D) 50.
Answer: B

Diff: 1


Topic: Production and Trading
32) Suppose the production possibilities for two countries, producing either food or clothing, are shown in Figure 10.2. They can each produce any linear combination as well. Measuring food on the horizontal axis, the joint production possibility frontier will have a slope of -1

A) only when 20 - 30 units of food are produced.

B) only when 10 - 20 units of food are produced.

C) only when 10 - 20 units of clothing are produced.

D) throughout the entire PPF.
Answer: A

Diff: 1


Topic: Production and Trading
33) Suppose the production possibilities for two countries, producing either food or clothing, are shown in Figure 10.2. They can each produce any linear combination as well. Measuring food on the horizontal axis, the joint production possibility frontier has a kink because

A) each country has a constant marginal rate of transformation that differs from the other country.

B) each country has a marginal rate of transformation that varies with the product mix.

C) all production possibility frontiers have kinks.

D) the two countries have the same marginal rate of transformation.
Answer: A

Diff: 1


Topic: Production and Trading
34) Competition results in the efficient product mix because

A) producers are setting MRT equal to minus the price ratio while consumers are setting MRS equal to minus the price ratio ensuring that MRT will equal MRS.

B) consumers are on the contract curve.

C) the slope of the production possibility frontier will equal the slope of the contract curve.

D) the distribution of the final output is Pareto efficient.
Answer: A

Diff: 1


Topic: Production and Trading
35) By saying that MRS = MRT, an economist means that

A) for all goods, the value that society places on the last unit produced equals the cost of making that unit.

B) for all goods, the value that a consumer places on the last unit consumed equals the value that all consumers would place on that unit.

C) society is able to produce more output of one good without reducing the output of any other good.

D) no other output mix is technically feasible.
Answer: A

Diff: 2


Topic: Production and Trading
36) A cake is to be shared by two people. Both desire the largest piece possible. One of the two will cut the cake. Under which of the following situations will the cutter adopt a Rawlsian social welfare function?

A) The person cutting the cake chooses the first piece.

B) The person not cutting the cake chooses the first piece.

C) The two individuals will bid for the right to cut the cake and choose first.

D) The two individuals will toss a coin for the right to cut the cake and choose first.
Answer: B

Diff: 2


Topic: Efficiency and Equity
37) Suppose in a democratic society, all voters prefer choice G over choice B; however, when the two choices are presented along with a third choice, R, B wins the election. This violates the assumption of

A) transitivity.

B) non-dictatorship.

C) independence of irrelevant alternatives.

D) completeness.
Answer: C

Diff: 1


Topic: Efficiency and Equity
38) If everyone's utility is given equal weight and a change in resource allocation results in one person's gain exceeding another person's loss, we can say that the new allocation

A) is Pareto superior to the original one.

B) increases social welfare.

C) decreases social welfare.

D) is efficient.
Answer: B

Diff: 1


Topic: Efficiency and Equity
39) If a society only cares about efficiency and not equity, then

A) all points on the contract curve yield the same level of social welfare.

B) it will not rely on competitive markets to allocate goods.

C) it will maximize the utility of its worst-off member.

D) an equitable outcome is impossible.
Answer: A

Diff: 1


Topic: Efficiency and Equity
40) If a society relies on competitive markets to allocate goods, then

A) an equitable distribution is assured.

B) an equitable distribution is certain to not occur.

C) the competitive equilibrium will be Pareto superior to any other.

D) social welfare as measured by consumer surplus plus producer surplus will equal zero.
Answer: C

Diff: 1


Topic: Efficiency and Equity
41) A dictator is most likely to

A) adopt a Rawlsian social welfare function.

B) maximize her own utility.

C) place equal weight on everyone's utility function.

D) have nontransitive preferences.
Answer: B

Diff: 1


Topic: Efficiency and Equity
42) If society were to maximize the utility of its worst-off member, the final allocation would most likely be

A) relatively egalitarian.

B) on the contract curve.

C) Pareto efficient.

D) one in which one person gets everything.
Answer: A

Diff: 1


Topic: Efficiency and Equity
43) If society were to maximize the utility of its best-off member, the final allocation would be

A) perfect equity.

B) on the contract curve.

C) Pareto efficient.

D) one in which one person gets everything.
Answer: D

Diff: 1


Topic: Efficiency and Equity
44) For most commonly used social welfare functions, an efficient allocation is

  1. always preferred over any inefficient allocation.

  2. not possible.

  3. usually preferred.

  4. never preferred.

Answer: C

Diff: 1

Topic: Efficiency and Equity

TRUE/FALSE/EXPLAIN
1) Any point on the contract curve is Pareto efficient regardless of the initial endowment.
Answer: True. Efficiency requires that no gains from trade are possible. This true along the contract curve.

Diff: 1


Topic: Trading Between Two People
2) If two grade-school children willingly trade their lunches with one another, we can conclude that at least one of them preferred the other's lunch to his own.
Answer: True. Either one or both preferred the other's. If only one preferred the other's, then the other must have been indifferent between the two lunches.

Diff: 1


Topic: Trading Between Two People
3) A competitive equilibrium is not Pareto efficient if some members of society are unable to afford a necessary good.
Answer: False. The competitive equilibrium described is efficient since all consumers set MRS equal to the price ratio. The problem with the described equilibrium is one of distributive justice not efficiency.

Diff: 1


Topic: Competitive Exchange
4) If MRS's are equal across all consumers, then the efficient product mix has been achieved.
Answer: False. Consumption efficiency has been achieved for the given product mix, but the given product mix is efficient only if MRT equals the MRS for all pairs of goods.

Diff: 1


Topic: Production and Trading
5) At a given point in time, the Rawlsian welfare function gives equal weight to each individual's utility.
Answer: False. The Rawlsian welfare function gives a weight of 1 to the utility of the worst-off person and a weight of zero to the utilities of all others.

Diff: 2


Topic: Efficiency and Equity
PROBLEMS
1) Employing a general equilibrium approach, describe the effect of a new law that prohibits steel imports.
Answer: The initial effect is that the supply curve for steel shifts leftward. This raises the price of steel. The largest users of steel are the automobile industry, the construction industry and the appliance industry. The increased cost of inputs will raise the price of the goods produced by these industries. Given time, these industries will look to substitute plastic or aluminum in place of steel, raising the prices of these materials.

Diff: 0


Topic: General Equilibrium


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